STOCK HOLDING CORPORATION OF INDIA LTD, MUMBAI V. D.C.I.T.- 3(3), MUMBAI

ITA 1606/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8325 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 20-08-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 24-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VIJAY KUMAR TIYADI
• Keywords: Capital asset; Depreciation; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUM BAI .. , , BEFORE SHRI I. P. BANSAL, JM AND SHRI SANJAY ARORA , AM ./ I.T.A. NO. 1606/MUM/2011 ( / ASSESSMENT YEAR: 2007-08) STOCK HOLDING CORPORATION OF INDIA LTD. C/O. KALYANIWALLA & MISTRY, ARMY & NAVY BUILDING, 3 RD FLOOR, 148, M. G. ROAD, FORT, MUMBAI-400 001 / VS. DY. CIT-3(3), AAYAKAR BHAVAN, M. K. MARG, MUMBAI ./! ./PAN/GIR NO. AABCS 1429 B ( ' /APPELLANT ) : ( #$ ' / RESPONDENT ) ' % & / APPELLANT BY : SHRI M. M. GOLVALA & SHRI VIJAY KUMAR TIYADI #$ ' % & / RESPONDENT BY : SHRI TUSHAR DHAWAL SINGH ' ()* % +, / DATE OF HEARING : 20.08.2014 -./ % +, / DATE OF PRONOUNCEMENT : 22.08.2014 0 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-7, MUMBAI (CIT(A) FOR SHO RT) DATED 13.12.2010, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMEN T YEAR (A.Y.) 2007-08. 2. THE DISPUTE IN THE INSTANT CASE CONCERNS THE MAI NTAINABILITY IN LAW OF THE ASSESSEES CLAIM FOR BAD DEBTS WRITE-OFF IN ACCOUNT S, IN THE FACTS AND CIRCUMSTANCES OF ITS CASE. THE BRIEF FACTS ARE THAT THE ASSESSEE PROVIDI NG, AMONG OTHERS, CUSTODIAL AND 2 ITA NO. 1606/MUM/2011 (A.Y. 2007-08) STOCK HOLDING CORPORATION OF INDIA LTD. VS. DY. CIT DEPOSITORY SERVICES TO INSTITUTIONAL AND RETAIL INV ESTORS, WROTE OFF THE IMPUGNED AMOUNT OF RS.1.03 CRORES DUE FROM ITS CUSTOMERS IN ITS ACCOUN TS FOR THE RELEVANT YEAR AS IRRECOVERABLE. THE LAW IN THE MATTER STANDS SINCE S ETTLED BY THE APEX COURT PER ITS DECISION IN THE CASE OF T.R.F. LTD. VS. CIT [2010] 323 ITR 397 (SC), SO THAT THE WRITE-OFF IN ACCOUNTS IS ITSELF SUFFICIENT FOR THE PURPOSE OF A CLAIM FOR BAD DEBT U/S.36(1)(VII) OF THE ACT AND, FURTHER, ALSO CONCLUSIVE OF THE YEAR OF IT S BECOMING BAD, SO THAT THE CLAIM SHALL ARISE FOR THE YEAR OF THE WRITE-OFF. THERE IS ALSO NO CHARGE OF THE CLAIM BEING NOT GENUINE IN THE INSTANT CASE, WHICH, WHERE SHOWN TO BE SO, S HALL PRECLUDE DEDUCTION (REFER: DIT (IT) VS. OMAN INTERNATIONAL BANK SAOG [2009] 313 ITR 128 (BOM)). THE BONE OF CONTENTION BETWEEN THE PARTIES IS THAT THE RESOLUTION OF THE B OARD OF DIRECTORS (BOARD HEREINAFTER) SANCTIONING THE SAID WRITE-OFF IS DATED 25.07.2007 , SO THAT THE SAME, IN THE OPINION OF THE REVENUE, COULD ONLY BE VALIDLY WRITTEN OFF IN ACCOU NTS ON OR AFTER THE SAID DATE, I.E., 25.07.2007. THE CLAIM IS THUS NOT VALID FOR THE CU RRENT YEAR, AND WOULD ARISE ONLY FOR THE FOLLOWING YEAR, I.E., A.Y. 2008-09. THE RESOLUTION DID NOT SANCTION BACK DATING THE WRITE- OFF, WHICH HAS BEEN SO DONE ONLY WITH A VIEW TO RED UCE THE INCOME FOR THE CURRENT YEAR. THE ASSESSEE, ON THE OTHER HAND, CLAIMS THAT THE DE CISION BY THE BOARD, THOUGH TAKEN DURING F.Y. 2007-08, WOULD RELATE BACK TO 31.03.200 7, I.E., THE DATE AT WHICH THE ACCOUNTS WERE ACTUALLY WRITTEN-OFF IN ACCOUNTS BY A CORRESPO NDING DEBIT TO THE PROFIT AND LOSS ACCOUNT (PB PG. 15). THERE IS NO BAR IN LAW FOR PAS SING AN ENTRY IN ACCOUNTS AFTER THE CLOSE OF THE RELEVANT YEAR. IN FACT, DIFFERENT STAT UTES ALLOW TIME FOR CLOSING OF THE ACCOUNTS, AND FILING THE RETURNS, BASED THEREON. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 WE SHALL PROCEED BY REPRODUCING THE RELEVANT RE SOLUTION, AS UNDER: THIS IS TO CERTIFY THAT THE BOARD AT ITS MEETING H ELD ON JULY 25, 2007 CONSIDERED THE MEMORANDUM NO. 87/2007 DATED JULY, 1 9, 2007 WITH RESPECT TO AUDITED ACCOUNTS FOR THE YEAR ENDED MARCH 31, 20 07 INTERALIA CONTAINING THE FOLLOWING: RESOLVED THAT AN AMOUNT OF RS.103 LAKH BE AND IS H EREBY WRITTEN OFF AS BAD DEBTS. 3 ITA NO. 1606/MUM/2011 (A.Y. 2007-08) STOCK HOLDING CORPORATION OF INDIA LTD. VS. DY. CIT THE RESOLUTION PASSED ON 25.07.2007, CLEARLY SANCTI ONS THE WRITE-OFF IN ACCOUNTS FOR THE YEAR ENDING 31.03.2007, DEBTS FOR AN AGGREG ATE AMOUNT OF RS.103 LACS, OUTSTANDING AS ON 31.03.2007, AS BAD. THE SAME IS, THUS, IN THE NATURE OF A POST FACTO APPROVAL. THERE IS FURTHER NOTHING ON RECORD TO SHOW OR EXHIB IT THAT THE ACCOUNTING ENTRY IN RESPECT OF THE IMPUGNED WRITE OFF WAS NOT PASSED ON 31.03.2007 ITSELF. IS IT NECESSARY, ONE MAY ASK, THAT A SEPARATE RESOLUTION IS REQUIRED TO BE PASSED BY THE BOARD FOR PASSING EVERY ACCOUNTING ENTRY ? THE PASSING OF AN ACCOUNTING ENTRY DOES NOT REQUIRE PRIOR SANCTION OF THE BOARD, AND IT IS FULLY WITHIN THE P OWER OF THE OPERATIONAL MANAGEMENT, VESTED IN THE MANAGING/WHOLE-TIME DIRECTOR OR THE D IRECTOR (FINANCE), THOUGH WOULD DEFINITELY REQUIRE RATIFICATION BY THE BOARD IN-AS- MUCH AS IT IS ONLY IT WHICH IS COMPETENT TO AUTHENTICATE THE ACCOUNTS IN LAW (SECTION 215 OF THE COMPANIES ACT, 1956), AND WHICH HAS BEEN THE CASE. FURTHER, EVEN ASSUMING THAT THE ENTRY WAS ACTUALLY PASSED SUBSEQUENT TO 31.03.2007, WHETHER ON OR BY 25.07.2007, THE QUESTI ON IS: IS THERE ANYTHING IN LAW OR ACCOUNTANCY TO PRECLUDE THE PASSING OF AN ACCOUNTIN G ENTRY AFTER THE DATE OF THE TRANSACTION OR THE EVENT TO WHICH IT PERTAINS, I.E. , ARE THE ACCOUNTS TO BE PREPARED ON REAL TIME BASIS ? CLEARLY, THERE IS NO SUCH REQUIREMENT EITHER IN L AW OR IN PRACTICE. AS SHOWN BY THE LD. AUTHORIZED REPRESENTATIVE (AR), ON BEING QU ERIED IN THE MATTER DURING HEARING BY THE BENCH, THE ACCOUNTS FOR THE YEAR STAND ADOPTED BY THE BOARD ON 25.07.2007, ON WHICH DATE THE ACCOUNTS STAND ALSO CERTIFIED AND REPORTED UPON BY THE AUDITORS (PB PGS. 1-25). NO DOUBT, NO ENTRY CAN BE PASSED WITHOUT MANAGEMENT APPROVAL, WITH THE BOARD BEING VESTED WITH THE OVERALL POWER OF MANAGEMENT. HOWEVE R, THERE IS NOTHING TO SHOW THAT THE SAID ENTRY, PASSED EITHER ON OR BY 25.07.2007, WAS PASSED WITHOUT THE REQUISITE APPROVAL OF THE CONCERNED OFFICER IN THE MANAGEMENT HIERARCH Y, EVEN AS THE BOARD APPROVAL THEREOF STANDS DULY TAKEN. EVEN AS CLARIFIED ABOVE, IT IS O NLY THE ACCOUNTS, DULY AUTHENTICATED BY THE BOARD, THAT CAN BE CONSIDERED AS VALID, AND AS SIGNIFYING/CONVEYING ITS REPRESENTATION AND/OR STATEMENT OF THE STATE OF AFFAIRS (AS ON A P ARTICULAR DATE). THE ACCOUNTS APPROVED AND ADOPTED BY THE BOARD ON 25.07.2007 ARE AS ON 31 .03.2007, BEARING THE WRITE-OFF IN 4 ITA NO. 1606/MUM/2011 (A.Y. 2007-08) STOCK HOLDING CORPORATION OF INDIA LTD. VS. DY. CIT ACCOUNTS ON THAT DATE. THE ACCOUNTING ENTRIES, AS L ONG AS THEY PERTAIN TO THE PERIOD UNDER REFERENCE, AND PURPORT TO REPRESENT THE STATE OF AF FAIRS AS ON A PARTICULAR DATE, COULD BE PASSED VALIDLY SUBSEQUENTLY. TO THE EXTENT, THEREFO RE, THE SAME IS REFLECTIVE AND REPRESENTATIVE OF THE CONDITION/S EXISTING AS ON TH AT DATE, VIZ. 31.03.2007, THE ENTRY CANNOT BE SAID TO BE BACK-DATED. INFORMATION COMES TO THE KNOWLEDGE OF THE MANAGEMENT AFTER 31 ST MARCH, PERTAINING TO THE STATE OF AFFAIRS AS ON 31 ST MARCH, I.E., HAVING A BEARING ON THE VALUATION OF THE ASSETS/LIABILITIES AS ON THAT DATE . WHERE THE ACCOUNTS STAND NOT FINALIZED, IT SHALL BE OPEN; RATHER, OBLIGATORY ON THE PART OF TH E MANAGEMENT TO RECORD/FACTOR THE SAID INFORMATION IN THE ACCOUNTS AS ON 31 ST MARCH. THE REVENUES OBJECTION IS MISCONCEIVED. THE ASSESSEE HAS RIGHTLY RELIED ON THE DECISION IN THE CASE OF CIT VS. UNITED BANK OF INDIA [1993] 115 CTR (CAL) 35, TO WHICH REFERENCE WAS MAD E DURING HEARING (COPY ON RECORD). WE DERIVE SUPPORT THERE-FROM, AS WELL AS FROM THE D ECISION IN THE CASE OF SHRIRAM ASSET MANAGEMENT CO. LTD. VS. DY. CIT (IN ITA NO. 2351/MUM(E)/2012 DATED 30.04.2013/COPY ON RECORD), ALSO RELIED UPON. 3.2 WE MAY NEXT DISCUSS THE CASE LAW RELIED UPON BY THE REVENUE. THE WRITE-OFF IN THE CASE OF CIT VS. HEREDILLA CHEMICALS LTD. [1997] 225 ITR 532 (BOM) DID NOT PERTAIN TO THE WRITE-OFF OF A DEBT. THERE WAS NOTHING TO SHOW THAT THE ASSET HAD BECOME OBSOLETE AND, THUS, THE EXPENDITURE/LOSS HAD BEEN INCURRED/S UFFERED. ITS WRITE-OFF IN ACCOUNTS WAS THEREFORE NOT CONSIDERED AS DETERMINATIVE OF THE FA CT OF THE LOSS HAVING BEEN INCURRED. IT WAS UNDER THESE CIRCUMSTANCES THAT THE HONBLE COUR T HELD THAT THE WRITE-OFF SHALL NOT ENTITLE THE ASSESSEE TO CLAIM DEDUCTION. IN FACT, T HE WRITE-OFF WAS OF A PLANT, A CAPITAL ASSET, LOSS QUA WHICH ON WRITE-OFF WOULD BE ON CAPITAL ACCOUNT, GOV ERNED BY DEPRECIATION PROVISIONS. THE SAID DECISION IS THUS COMPLETELY DI STINGUISHABLE ON FACTS. THE WRITE-OFF IN EASTERN PERIPHERALS (P.) LTD. (IN ITA NO. 321/MUM/2007 DATED 31.08.2007), WAS AGA IN OF MATERIALS, SCRAP AND CONSUMABLES, SO THAT THE TR IBUNAL, FOLLOWING THE DECISION IN THE CASE OF HEREDILLA CHEMICALS LTD. (SUPRA), UPHELD THE DISALLOWANCE. THE SAID DECISIO N IS THUS AGAIN ON THE FACTS OF THE CASE, ON THE PREMISE THAT THE WRITE-OFF WOULD NOT BY ITSELF SIGNIFY A LOSS, WHILE THE PRESENT CASE IS GOVERNED BY THE PROVISION OF SECTION 36(1)(VII), THE SATISFACTION OF THE CONDITIONS OF WHICH IS NOT IN DISPUTE. THE DECISION IN THE CASE OF 5 ITA NO. 1606/MUM/2011 (A.Y. 2007-08) STOCK HOLDING CORPORATION OF INDIA LTD. VS. DY. CIT SAMPANNA KURIES (P.) LTD. VS. DY. CIT [2012] 206 TAXMAN 57 (KER)(MAG)/249 CTR 210 (KER), IS AGAIN DISTINGUISHABLE IN-AS-MUCH AS IN TH AT CASE THE ASSESSEES CLAIM WAS DE HORS THE WRITE-OFF IN ACCOUNTS OF THE DEBT/S CLAIMED AS BAD. THE ESSENTIAL CONDITION OF WRITE-OFF PER SECTION 36(1)(VII) BEING UNSATISFIED, THE HONB LE COURT UPHELD THE TRIBUNALS ORDER CONFIRMING THE DISALLOWANCE. THE SAID DECISIONS ARE , THUS, DISTINGUISHABLE, AND WOULD BE OF NO ASSISTANCE TO THE REVENUE. 3.3 IN VIEW OF THE FOREGOING, WE FIND LITTLE MERIT IN THE REVENUES CASE. WE, ACCORDINGLY, SETTING ASIDE THE ORDERS BY THE AUTHOR ITIES BELOW ON THE RELEVANT ISSUE, DIRECT ALLOWANCE OF THE ASSESSEES IMPUGNED CLAIM. WE DECI DE ACCORDINGLY. 4. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. 1/+2 (341+ % ) 5 + % + 67 ORDER PRONOUNCED IN THE OPEN COURT ON AUGUST 22, 20 14 SD/- SD/- (I. P. BANSAL) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ' * MUMBAI; 8( DATED : 22.08.2014 ).(. ./ ROSHANI , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #$ ' / THE RESPONDENT 3. ' 9+ ( ) / THE CIT(A) 4. ' 9+ / CIT - CONCERNED 5. <)=> #+(?3 , , ?3/ , ' * / DR, ITAT, MUMBAI 6. >@4 A* / GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , ' * / ITAT, MUMBAI